Relying on Sales Won’t Eliminate Causes of Shrinkage

causes of shrinkage

Chances are, you’re heard someone say “sales cure shrink” or they plan to “outsell their retail shrink.” When this statement is used, the person uttering the words often has no idea what they are saying. Because of this, it’s easy to dismiss this statement. After a while, it may even label the person saying it as foolish.

However, is there any basis in fact to this statement?

What if we remove the person from the statement and examine it solely on the basis of fact? Can ignoring the causes of shrinkage and refocusing strictly on sales solve our inventory issues?

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As an experiment, let’s start with $1 million in sales and 2% inventory shrink as a percent to sales. Keeping the shrink dollars static, we can determine the sales dollars and corresponding shrink percent at every 1% increase or decrease in sales. If you look at each percent up to a 20% sales increase and a 20% sales decrease, the answer to the sales/shrink argument is very clear. The 20% sales lift versus 20% decrease is the difference between 1.7% and 2.5% shrink assuming our original 2.0% shrink dollars.

The answer is that sales can “cure” shrink, and alternatively, create a shrink monster if we’re experiencing a sales decrease. Shrink dollars remained the same, but the difference between 1.7% and 2.5% shrink could be a promotion and a termination. The exercise takes place in a vacuum, but it’s interesting to see the concept in action. The person who argues that “sales cure shrink” probably doesn’t have a grasp of this concept. Frequently, this phrase is used to push forward an agenda.

So How Should We Approach The Causes of Shrinkage?

Am I suggesting that we should stop our loss prevention efforts and become sales associates? Absolutely not.

I believe performing the “sales affecting retail shrink” exercise is useful, so we can fully understand the data when having these types of conversations. Blindly dismissing the concept could make us as guilty as the person blindly using sales to justify not proactively addressing the real causes of shrinkage. Paradoxically, understanding that sales can technically “cure” shrink is a powerful weapon during this discussion.

I believe the powerful piece of this statement is what percent of a sales increase we plan to achieve out of a proposed idea. One may approach this in a positive manner and say “Great! How much of a sales increase are you projecting?” We know from the exercise above that it takes a significant sales increase to “cure” shrink.

In our example, it took a 9% sales increase to break a .1% reduction in shrink. For most retailers, 9% is an aggressive sales increase, and it only reduced retail shrink by .1%. Our 2.0% is now 1.9%, assuming that the selling activity did not add any additional shrink dollars. However, the “sales cure shrink” conversation normally assumes that there will be increased losses, but the sales increase will make up for any losses. Unfortunately, shrink losses can quickly consume any profits from a modest sales increase.

Like many solutions, the best answer may lie in the center of the two ideas. If we are creative and work together, we can increase sales and reduce shrinkage. I realize that I’m not breaking new ground with that idea. Increasing sales and reducing shrink is the foundation of most loss prevention methods. However, I found it valuable to demonstrate how these two financials affect each other.

It’s easy to learn an idea from someone else and put it into practice, but actually testing it and observing the results instills confidence in the idea that you cannot obtain any other way.

This article was originally published in 2014 and was updated August 6, 2018.

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